Wall Street slumps as world reacts to Dubai

Oil, gold prices tumble; rush to safety of Treasurys, dollar

By

PeterMcKay

NEW YORK (MarketWatch) -- Stocks slumped Friday as investors reacted to a debt crisis in Dubai, with more repercussions likely on tap the next few days as traders return from major holidays in both the U.S. and Middle East.

The stock market's slide began in Europe, continued in Asia, and then through the U.S. trading session after Dubai said it would delay repayments on $60 billion of debt from its investment company, Dubai World. The decision raised broader questions about the safety of emerging-market debt and the strength of the global recovery. Details on latest Dubai developments.

Opening the day ominously, the Dow Jones Industrial Average
DJIA, +0.27%
was off 233 points at its morning low, and it ended the shortened post-Thanksgiving session down 154.48 points, off 1.5%, at 10,309.92. The Dow, which entered Friday's session at a 13-month high, ended the week down 0.1%, snapping a three-week winning streak.

Because of the commodities slide, the S&P 500's basic-materials and energy sectors each fell 2.4% Friday. All the index's other sectors traded lower as well, pushing it to a 1.7% decline overall.

Crude futures were off $1.70 at $76.26 a barrel. Gold contracts slid $10.60 to $1,178 per ounce in New York. The broad Dow Jones-UBS Commodity Index was off 1.2%.

Traders and money managers drew some comfort from the U.S. market's recovery from its intraday lows Friday.

Many point out that Dubai's main creditors are European banks, not Wall Street firms. But that could still lead to gyrations next week and beyond if investors with exposure to Dubai's troubles continue to unload commodities, U.S. shares, and other assets that have shown hefty gains this year to raise cash.

"We still need to see if there's going to be a domino effect here," with Dubai's credit woes spreading to its neighbors and trading partners, said Kevin Shacknofsky, of Alpine Woods Capital Investors. "The markets are telling us for now that this is a containable problem, but we're not absolutely certain of that yet."

In particular, investors are waiting to see details of possible aid from oil-rich Abu Dhabi to prop up Dubai. Both are city-states within the federation known as the United Arab Emirates, which was the world's eighth-largest oil producer in 2008, according to U.S. government data.

Analysts said such a rescue may have to be hammered out in the coming days, since many key players in the Middle East are away Friday for the Eid Al-Adha holiday marking the end of the annual Muslim pilgrimage to Mecca. Also, trading has been light in the U.S. on Friday, with many participants taking an extended Thanksgiving break.

In a Thanksgiving note to clients, David Kotok, president of the portfolio-management firm Cumberland Advisors, warned of potential contagion from the Dubai crisis. "We want to see the market make the adjustment for this risk before we resume a fully invested posture," in stocks, Kotok wrote. His firm has recently been building its cash reserves.

On Wall Street, Chevron
CVX, +0.12%
and Exxon Mobil
XOM, -0.01%
were among the energy stocks that fell, while AK Steel
AKS, -3.82%
and Freeport-McMoRan Copper & Gold
FCX, +0.54%
were among the metals decliners. According to data from the federal Energy Information Administration, the United Arab Emirates was the world's eighth-largest oil producer in 2008. It is also believed to hold a sizable official reserve of gold.

The declines in commodities came as investors moved into the dollar and Treasurys, reflecting a renewed fear of risky assets given the concerns over Dubai World's debt. The U.S. Dollar Index
DXY, +0.55%
, which measures the greenback against a basket of six other currencies, rose 0.6% recently.

The 10-year Treasury bond slid 12/16 to yield 3.223%.

The U.S. stock market will close at 1 p.m. Eastern for the holiday weekend, and Wall Street trading is known for being particularly thin the day after Thanksgiving.

"Everything seemed to be pretty much OK and better than expected, so this is an interesting twist and we don't know whether this will be just a blip or a big concern," said Deborah Danielson, president of Danielson Financial Group.

Jeff Grossman, a commodity trader at BRG Brokerage in New York, said the slides in both oil and gold could continue in the days ahead as investors with exposure to Dubai World sell other assets to cover their losses. Coming into Friday's session, oil was up about 75% for the year and gold was up about 34% -- gains that could now prove to be an attractive source of cash for investors who have ridden out the boom.

And given the timing after the Thanksgiving holiday, the market reaction on Friday may not reflect as big of a reaction to the Dubai World troubled as Monday's action could, Danielson noted.

While institutional investors are aware of the news, many of them weren't at work Friday. Retail investors, on the other hand, are likely just hearing the news and haven't yet had time to think about its potential ramifications.

"It's a short trading day, and the news came out but people had other plans," Danielson said. "A lot of people are traveling. It will be more interesting to see what happens Monday after they've had a chance to digest it."

The unofficial start to the holiday shopping season, known as Black Friday, has typically been the focus for the market the day after Thanksgiving. This year, investors said they would be paying particular attention to what the Black Friday sales would indicate about the state of the consumer and whether Dow's 60% jump since its 12-year low on March 9 could be justified. However, the Dubai World news appears to have stolen Black Friday's thunder.

Fears have been spreading since late Wednesday about the potential fallout of debt problems at Dubai World, the city-state's largest corporate entity, which asked creditors for a six-month stay on repayment of its $60 billion in debts.

U.S. markets were unable to immediately react as they were closed for the Thanksgiving holiday Thursday, but the Asia and Europe markets sold off Thursday on the news. European banks and most other shares later erased their losses. See latest on European Markets.

Michael Church, president of Addison Capital, said that gives him hope that the impact of Dubai World's debt problems might not be too drastic for the U.S. stock market.

"Until we get more information, I'm not sure this is more than a bit of a knee-jerk reaction," Church said. He added, "This is a difficult day because you have a half day, you have a lot of people not at desks today, it's odd news to begin with, and not a lot of information is out as to how it's going to shape out. We'll be treating it at face value, just watching it unfold for now."

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